Banking crisis looms, BMI warns

By Omoh Gabriel, Business Editor
LAGOS â€” BUSINESS Monitor International has warned of a looming major banking crisis in Nigeria in 2009 and 2010 as the sector faces sizeable domestic and international challenges.
Business Monitor Internationalâ€™s country risk analysis and forecasts, market research on leading industries, and multinational company research is relied upon by corporate bodies, banks, government departments and multilateral organisations in over 125 countries around the world.

BMI has for 25 years specialised in political risk analysis, financial markets analysis, and macroeconomic forecasts on 175 global markets.

The London-based research and business advisor said, in its macro economic analysis of Nigeria released yesterday, that such crisis will jeopardise future investments in the country.

The impending crisis may be accelerated by the new posture of the Central Bank Governor Sanusi Lamido Sanusiâ€™s threat to fire bank Managing Directors which has sent shock waves into the banking system and has created uncertainty and waning confidence in the industry.

Business Monitor International said in its report on Nigeria â€œwe warn that the risk of a major banking crisis in 2009 or 2010 could jeopardise investments, posing long-term risks to the business environment. We are cautious about the apparent progress in the fight against corruption, after the country moved from 147th place to 121st place out of 180 countries in Transparency Internationalâ€™s 2008 Corruption Perceptions Index, as anecdotal evidence suggests the fight against corruption has moved backwards.

â€œThe global recession will particularly hurt the prospects for investment in 2009; and, on the back of a large contraction in gross fixed capital formation, we are forecasting significantly reduced real GDP growth in 2009. Indeed, we highlight the risk of outright contraction, particularly if the Nigerian banking sector suffers widespread collapse on the back of lower oil revenues and looming losses from exposure to the Nigerian stock exchangeâ€.

BMI said â€œLast quarter, we ran a scenario test about the implications to Nigeria if average oil prices in 2009 fell to $50.00/bl: this scenario has now become our core view, and the various challenges we outlined in the scenario test have manifested themselves.

Nigeriaâ€™s government, facing substantially lower oil revenues in 2009, will push through a large fiscal deficit, which we believe will be financed via the excess crude account. Meanwhile, growth is forecast to fall below 4.0 per cent for the first time since 2000, with risks to the downside.

â€œAs we warned, export receipts will fall by a large amount, but a devaluation of the naira leads us to believe the cost of imports will also decrease by enough for the country to maintain a slim current account surplus. Meanwhile, one of the most pressing risks for the country in 2009 and 2010 will be a widespread crisis in the banking sector, which is facing sizeable domestic and international challenges.

â€œOn the political front, the authorities have reacted to the worsening economic situation with a budget that pushes expenditure up, at the cost of a large deficit.

â€œWhile the authorities have stated they intend to cover the cost of expenditureâ€™s overreach with a combination of one-off financing sources and international and domestic borrowing, we believe the country will eventually opt to make use of its oil savings.

The excess crude account is large enough more than fully to cover the 2009 deficit, and we believe tapping its resources may have a lower long-term impact on public finances than borrowing at presently high rates of interest.

â€œThe sudden and sharp devaluation of the naira has ended talk in Nigeria that the country is insulated from the global economic crisis, and we believe the exchange rate has further to fall in the medium term, despite the efforts of the central bank to control banksâ€™ ability to access foreign currency.

The global recession will particularly hurt the prospects for investment in 2009; and, on the back of a large contraction in gross fixed capital formation, we are forecasting significantly reduced real GDP growth in 2009. Indeed, we highlight the risk of outright contraction, particularly if the Nigerian banking sector suffers widespread collapse on the back of lower oil revenues and looming losses from exposure to the Nigerian stock exchange.

â€œPhysical infrastructure needs improvement; the government is committed to supporting its growth, both by prioritising expenditure in the budget and by attracting investment from the Middle East.

That said, we warn that the risk of a major banking crisis in 2009 or 2010 could jeopardise such investments, posing long-term risks to the business environment. We are cautious about the apparent progress in the fight against corruption, after the country moved from 147th place to 121st place out of 180 countries in Transparency Internationalâ€™s 2008 Corruptions Perceptions Index, as anecdotal evidence suggests the fight against corruption has moved backwardsâ€.